London court may decide on €2.8bn Kiev default in bonds

A two-year feud between Ukraine and Russia is on the verge of being played out in a London courtroom after the government in Kiev defaulted on $3 billion (€2.75bn) in bonds.

Ukrainian President Petro Poroshenko followed through on months of threats on Friday by reneging on the debt sold by his predecessor to Russian President Vladimir Putin in December 2013, two months before Viktor Yanukovych was toppled and the former Soviet republics went from allies to adversaries.

The bond has since become a focal point of the deteriorating ties.

As Putin’s annexation of Crimea and support of separatists in Ukraine’s easternmost regions battered the economy, the government in Kiev came to the brink of insolvency before securing aid from the IMF.

To qualify for the bailout, Ukraine negotiated a $15bn (€13.8bn) debt restructuring with investors including Franklin Templeton.

Russia refused to take part. While there are signs the two sides are willing to reach an out-of-court settlement, a legal battle in the UK, either through the court system or arbitration, is a growing possibility.

Just hours after the moratorium was imposed, Russian Deputy Finance Minister Sergey Storchak reiterated that Moscow will sue, saying Ukraine has “no chance of winning this case.”

Prime Minister Dmitry Medvedev on Monday ordered the government to prepare a lawsuit.

The eurobonds were drafted under English Law, so any claim must be submitted to a court in London.

The prospectus also allows parties to use the London Court of International Arbitration, a tribunal favoured by former Soviet nations.

Russia has said it will sue Ukraine for the $3bn, plus an outstanding $75 million (€69m) interest payment and all other interest that accumulates between now and a court verdict.

Russia may opt for the latter as arbitration is faster and more discrete.

The country “probably has at least a reasonably strong case” of securing a ruling in its favour, according to Michael Waibel, a professor of international law at the University of Cambridge.

Getting its money back may prove challenging even if arbitrators order Ukraine to pay compensation.

Russia may try to seize Ukrainian state assets abroad through legal processes in the countries where they’re located, Mr Waibel said.

Andrew Wilkinson, a partner at law firm Weil Gotshal & Manges who worked on drafting Ukraine’s restructuring documents, said: “Legally, Russia’s options are very limited if it wants to get its money back.”

A defeat could cause “great embarrassment” for Mr Putin if a judge determines that Russia already had plans to annex Crimea when the bond documents were drawn up, according to Mitu Gulati, a law professor at Duke University specialising in sovereign debt.